YEARS MAKING MARKETS FUNCTION BETTER August 2012 CRISIL SMEFundamentalGrading Thejo Engineering Ltd CRISIL SME Fundamental Grade 5/5 (Excellent)
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Thejo Engineering Ltd YEARS CRISIL SME Fundamental Grade 5/5 (Excellent) MAKING MARKETS FUNCTION BETTER August 31, 2012 Grading summary CRISIL has assigned a CRISIL SME fundamental grade of SME 5/5 (pronounced "SME five on five") to the proposed IPO of Thejo Engineering Ltd (Thejo). This SME fundamental grade indicates that the fundamentals of the company are excellent compared to other SMEs in India. Key strengths Thejo has an established position in niche operations in bulk material handling, mineral processing and corrosion protection applications in power, cement, steel, ports and mining industries. Thejo also has a diversified client base and revenue mix. The company is expected to benefit from end-market trends such as (a) increased preference for outsourcing material handling operations, (b) growth in end-user industries, and c) increased preference for conveyors to transfer material. Further replacement demand will provide revenue stability. The company has a strong culture of innovation. The management s deep expertise in the industry has helped it to be proactive in product innovation, giving the company a competitive edge. Thejo s entry into overseas markets like Australia and Ghana has opened up new opportunities, though its success is a key monitorable. Key challenges The company operates in a cyclical industry its production declined 21.5% in FY10 due to economic slowdown. Thejo s Australian dealer (it contributed 12% of FY12 sales) was acquired by a competitor in February 2011, which has increased the company s risk of loss of business in Australia. However, given the customised product offerings, the company has maintained its sales to the client in FY12. Thejo has set up its own operations in Australia for conveyor belt related maintenance services and rubber lining activities to western Australian clients; however its success is a key monitorable. Volatility in key raw material (rubber) prices and forex rates may also affect Thejo s revenues and profits. (One-time assessment) Key financials Thejo s total income has grown at 26% CAGR over FY08-12 to Rs 1,096 mn driven by increase in realisations in the product business and strong growth in the services business. The company has been able to maintain its EBITDA margins in the range of 10.7-13.7% despite sharp increase in raw material prices as it passed on the increase to its customers. Its adjusted profit after tax grew at 67% CAGR over FY08-12 to Rs 67 mn due to operating leverage. Company background Incorporated in 1986, Chennai-based Thejo is promoted by Mr K. J. Joseph and Mr Thomas John. Initially, it provided only maintenance services for conveyor belts. It then started manufacturing rubber products and other products required for conveyor belts and material handling systems. Currently, Thejo designs, manufactures and supplies products for bulk material handling, mineral processing and corrosion protection to mining, power, steel, cement, ports and fertiliser industries. It also provides operation and maintenance services. It has established a subsidiary in Australia, Thejo Australia Pty Ltd, which intends to offer conveyor belt-related services and rubber lining activities, and sell bulk material handling and corrosion protection products in Western Australia. In Saudi Arabia, it has formed a JV with Hatcon Industrial Services W.L.L., (a Bahrain-based firm supplying products and providing services for oil and gas, petrochemicals, mining and marine sectors). 1
CRISIL SMEFundamentalGrading Grading Rationale Business prospects The demand for Thejo s niche products and services is expected to increase due to a) rise in power, cement and steel players preference to outsource non-core activities such as operation and maintenance of bulk material transfer systems, b) growth in end-user industries combined with increased preference for conveyors to transfer material, and c) strong replacement demand due to short (6-12 months) life cycle of the products. Thejo is in the process of entering the Australian and African markets, where it is currently present through its channel partners, on its own. CRISIL Research believes entry into these markets will open up new business opportunities for Thejo, though it will face stiff competition from international players. The debottlenecking of its existing manufacturing facility - through installation of new equipment - will increase the facility s capacity utilisation. The company plans to set up a polyurethane manufacturing facility and create additional infrastructure for rubber lining activities. CRISIL Research believes the company s planned expansion in international markets and cross-selling through its operations and maintenance (O&M) contracts will help it sell the incremental produce. Please see disclaimer on inside cover Thejo faces limited competition in the services business, where it claims a 60% market share. Currently, most of the conveyor operations in the industry are handled by the plant owners and competition in outsourced O&M services is limited. In the products business, Thejo faces stiff competition from large domestic players such as Tega Industries Ltd, MIL Industries Ltd as well as international players such as Metso and Rema Tip Top. Thejo has indigenously designed and developed various products, and patented a few of them. Thejo intends to set up a new R&D facility for product development. CRISIL Research believes a strong focus on product development and innovation will help the company brace up for competition from large established players. A diversified client base, product mix and marquee clients such as JSW Steel, Jindal Steel and Power, SAIL, Singareni Collieries will help Thejo minimise the risk of slowdown in any particular market/industry. One of the company s key global customers, Losugen Pty Ltd, Australia was acquired by one of Thejo s major competitors in February 2011. While Losugen has continued to buy products from Thejo given its customised offerings, the risk of client loss in the future cannot be ruled out. Volatility in key raw material prices (rubber) and foreign exchange may affect Thejo s revenues and profits. While it has been successful in passing on increases in raw material prices to customers, expected decline in rubber prices in FY13 may impact its profits. Management and corporate governance The promoters are well qualified and have vast experience in the industry. The company has inducted a professional CEO who is well qualified and has more than 25 years of experience in senior management positions. The second line of management too is highly experienced in their respective fields. The board consists of nine directors, of whom five are independent directors. We believe the size of the board is appropriate for the current size of the company and its planned progress. The board has diverse expertise in areas of management, finance, law and relevant technology. The independent directors are well qualified and experienced with strong standing in their respective fields. Mr Thomas John and his family own 34.28% of the company and Mr K. J. Joseph and his family own 44.5%. Both the promoters and their sons enjoy a healthy professional relationship and have well defined responsibilities However, the professional relationship between the promoter families is a key monitorable. 2
YEARS Thejo Engineering Ltd MAKING MARKETS FUNCTION BETTER Financials Thejo s production volume has grown at 1% CAGR over FY07-12. Economic slowdown impacted the production volume in FY10, but it recovered in FY11. The growth in product sales was primarily driven by 25% CAGR in realisations as the company passed on the ~21% CAGR increase in rubber prices. The product business grew at 17% CAGR over FY08-12 (primarily driven by increase in input prices) and the services business grew at 39% CAGR over the same period. The export business grew faster at 42% CAGR over FY08-12 as compared to 25% CAGR in the domestic business primarily due to increased focus on key overseas markets. Thejo s operating income has grown at 26% CAGR over FY08-12 to Rs 1,096 mn. EBITDA margins have remained stable in the range of 10.7-13.7% over FY08-12 despite competition and increase in rubber prices (key raw material) due to Thejo s strong relationship with customers. Thejo has kept a tight control on its debtors and inventory, and has effectively managed its working capital over the past few years despite strong sales growth. The net-debt to equity as on FY12 was 0.8x with an interest coverage of 3.7x. Over the past three years, Thejo has reduced its debt and improved coverage ratio. The company s net worth was Rs 257 mn as on FY12. Thejo has been paying dividend over the past six years (available history). It paid dividend of Rs 5.5 mn in FY12 (dividend rate of 10%). (One-time assessment) 3
CRISIL SMEFundamentalGrading Please see disclaimer on inside cover Income statement Balance Sheet (Rs mn) FY08 FY09 FY10 FY11 FY12 (Rs m n) FY08 FY09 FY10 FY11 FY12 Operating income 430 568 620 899 1,096 Liabilities EBITDA 46 63 75 99 151 Equity share capital 11 11 12 12 12 EBITDA margin 10.7% 11.1% 12.1% 11.0% 13.7% Reserves 91 100 128 161 246 Depreciation 11 14 15 15 16 Minorities - - - - - EBIT 35 49 60 84 134 Net w orth 102 111 139 173 257 Interest 20 28 26 28 37 Convertible debt - - - - - Operating PBT 14 22 34 56 98 Other debt 139 163 199 196 224 Other income 2 1 1 1 2 Total debt 139 163 199 196 224 Exceptional inc/(exp) - (0) - - 28 Deferred tax liability (net) 2 2 2 2 3 PBT 16 23 35 58 128 Total liabilities 242 275 341 371 484 Tax provision 7 10 12 19 38 Assets Minority interest - - - - - Net fixed assets 67 81 89 88 107 PAT (Reported) 9 12 23 38 90 Capital WIP 10 7-3 6 Less: Exceptionals - (0) - - 23 Total fixed assets 77 88 89 91 113 Adjusted PAT 9 12 23 38 67 Investments - - 3 3 20 Current assets Ratios Inventory 54 66 64 81 116 FY08 FY09 FY10 FY11 FY12 Sundry debtors 119 151 207 287 332 Grow th Loans and advances 59 71 85 110 189 Operating income (%) 17.6 32.0 9.2 44.9 22.0 Cash & bank balance 28 24 43 49 27 EBITDA (%) 21.3 37.7 18.4 32.2 52.2 Marketable securities - - - - - Adj PAT (%) 8.2 41.9 85.5 68.7 74.8 Total current assets 260 313 399 527 664 A dj EPS (%) (0.2) 41.9 69.8 68.7 74.8 Total current liabilities 95 126 151 250 313 Net current assets 166 187 249 277 351 Profitability Intangibles/Misc. expenditure 0 0 0 0 0 EBITDA margin (%) 10.7 11.1 12.1 11.0 13.7 Total assets 242 275 341 371 484 Adj PAT Margin (%) 2.0 2.2 3.7 4.3 6.1 RoE (%) 9.1 11.5 18.2 24.5 31.1 RoCE (%) 15.9 19.1 19.6 23.8 31.6 RoIC (%) 15.7 17.7 18.2 22.1 28.2 Cash flow (Rs mn) FY08 FY09 FY10 FY11 FY12 B/S ratios Pre-tax profit 16 23 35 58 100 Inventory days 57 54 48 41 49 Total tax paid (8) (10) (12) (20) (37) Creditors days 63 63 65 77 78 Depreciation 11 14 15 15 16 Debtor days 89 88 115 107 102 Working capital changes (24) (25) (43) (23) (96) Working capital days 103 94 114 85 100 Net cash from operations (4) 2 (5) 30 (17) Gross asset turnover (x) 3.3 3.6 3.4 4.5 5.0 Cash from investments Net asset turnover (x) 7.2 7.7 7.3 10.2 11.2 Capital expenditure (23) (26) (16) (16) (39) Sales/operating assets (x) 6.1 6.9 7.0 10.0 10.8 Investments and others - - (3) - (17) Current ratio (x) 2.8 2.5 2.7 2.1 2.1 Net cash from investments (23) (26) (19) (16) (56) Debt-equity (x) 1.4 1.5 1.4 1.1 0.9 Cash from financing Net debt/equity (x) 1.1 1.3 1.1 0.9 0.8 Equity raised/(repaid) 7-10 - - Interest coverage 1.7 1.8 2.3 3.0 3.7 Debt raised/(repaid) 29 24 37 (3) 28 Dividend (incl. tax) (3) (3) (4) (5) (6) Per share Others (incl extraordinaries) 0 (0) 0 (0) 23 FY08 FY09 FY10 FY11 FY12 Net cash from financing 34 21 43 (8) 45 A dj EPS (Rs) 8.0 11.3 19.2 32.3 56.5 Change in cash position 7 (4) 19 5 (27) Book value 93.7 102.0 117.7 146.0 217.3 Closing cash 28 24 43 49 27 Note: All figures have been reclassified as per CRISIL standards Source: CRISIL Research 4
YEARS Thejo Engineering Ltd MAKING MARKETS FUNCTION BETTER IPO Details The proposed IPO is in the form of fresh issue of shares up to Rs 210 mn, of which the company has done pre-ipo placement of Rs 20 mn to SIDBI Trustee Company Limited A/c India Opportunities Fund managed by SIDBI Venture Capital Limited. Thejo plans to invest maximum amount in Chennai units: Rs 6.8 mn on setting up a polyurethane unit, Rs 68.7 mn for expansion of its existing facility, Rs 16.9 mn for setting up a lining plant, Rs 28.3 mn for setting up R&D unit. It will invest Rs 64.2 mn in the Australian subsidiary and use the remaining proceeds for general corporate purposes (not available at the time of grading). Pre-IPO share holding pattern Name No of shares Percentage Promoter shareholding (A) 979,920 78.77 Institutional (B) 59,236 4.76 Non-Institution (C) 204,820 16.46 Total (A+B+C) 1,243,976 100 Source: DRHP Issue details Type of issue Fresh issue Issue Size Rs 210 mn Face value Rs 10 Price Band Rs 402-430 Lead Managers IDBI Capital Market Services Ltd Legal Advisors to the Issue Khaitan & Co. Registrar to the issue Cameo Corporate Services Ltd Source: DRHP Objects of issue Particulars Total fund requirement (Rs mn) Amount deployed till July 2012 (Rs mn) Estimated amount to be utilized from net proceeds (Rs mn) Estimated utilisation of net proceed (Rs mn) FY13 FY14 Setting up a polyurethane unit in Chennai 6.8 3.4 6.8 3.4 - Expansion of existing facility (Unit I) in Chennai 68.7 3.8 68.7 64.9 - Setting up a lining plant in Chennai 16.9-16.9 16.9 - Setting up R&D unit in Chennai 28.3 1.9 28.3 26.4 - Investment in Australian subsidiary - Thejo Australia Pty Ltd 64.2-64.2 64.2 - General corporate purposes # - - - - - Total* 184.9 9.1 184.9 175.8 - (One-time assessment) * Total does not include expense for general corporate purpose and issue related expenses; #not yet available Source: DRHP 5
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